Will Medicaid expansion create jobs?

Florida Governor Rick Scott’s stunning reversal on Medicaid expansion came on the same day a report was released that said expansion would create 71,300 jobs by 2016. Ron Pollak, the head of FamiliesUSA (which sponsored the study) even said that if the state says no to the federal funding, it “would be an act of fiscal malpractice.” Admittedly, the governor has not yet said whether this potential impact on jobs influenced his turnabout, impact. But given the anemic pace of the current economic recovery, there’s little doubt that this side-effect of Medicaid expansion might be an important factor for states that for now are either sitting on the fence or have tentatively elected not to proceed with expansion.[1]

But is it true? At the national level, this claim is demonstrably false. The Medicaid expansion will destroy more jobs than it creates. At the state level, the answer is more complicated. It depends on the ratio of newly eligible Medicaid recipients who are below poverty relative to the number who are above poverty. So now let’s unpack these conclusions to better understand them.

There’s abundant empirical evidence that on balance, expanding Medicaid will reduce employment. Admittedly, it will increase employment in the health sector and have positive spillover effects on industries that support that sector. Indeed, it is this positive impact that proponents have championed in their efforts to sway state policymakers to expand the program.

But at the national level, this is one-sided book-keeping, i.e., a shell game that ignores that every dollar going into the U.S. Treasury to finance this expansion is a dollar taken out of the private economy. That dollar would have been spent (i.e., “created” or supported jobs) anyway: the Medicaid expansion simply transfers the decision about how to spend that money to Washington, D.C.

But that makes it sound as if the expansion is a wash, creating as many new jobs as it destroys. Sadly, the reality is much worse. Every additional dollar of new taxes shrinks the economy. Virtually anything we tax we get less of, whether that be labor, consumption, or savings. Based on dozens of studies of this so-called “deadweight loss” or “excess burden” that inevitably accompanies higher taxes, I have calculated that currently every added dollar of federal taxes essentially shrinks the economy by 44 cents. Thus, if we convert this to jobs, we will lose 144 jobs for every 100 health sector-related jobs that are induced by expansion.

Technically, it’s worse than this. On average, health sector jobs pay more than other jobs in the rest of the economy.[2] Thus, we will lose even more than 144 jobs for each 100 health-sector-related jobs.

My figures may be conservative. President Obama’s former economic advisor, Christina Romer, calculated in a seminal paper published before her stint as CEA chief, that tax increases used to support increased spending (as opposed to deficit reduction) reduce the size of the economy by $2 to $3 for every dollar of new taxes raised. In that case, every new Medicaid-related job actually costs the economy at least 3 to 4 jobs elsewhere (i.e., 1 job that effectively was shifted into the health sector plus another 2-3 lost because the economy shrank as a consequences of the adverse effects of taxes used to bankroll the expansion).

At the State Level “It’s Complicated”

Unfortunately, at the state level, the issue gets much more complicated. Until and unless Obamacare is repealed, it is the law of the land, so most of the damaging effects of higher taxes will occur on each state’s own taxpayers regardless of what the state decides about Medicaid expansion. While the federal bribe (or ransom, if you prefer.[3]) is quite generous, it will require states to come up with 10 percent matching funds for expanded benefits and 50 percent of new administrative costs. The job losses associated with those added state taxes will offset at least some of the job gains coming from the infusion of new federal dollars into a state.

But this is where things get even more complicated. Leave aside the fact that the new Florida study assumes that the newly covered number by Medicaid will be nearly 80 percent larger than previous estimates. What’s more important is the baseline used to calculate the purported 71,000 job increase resulting from the expansion. The study focused on the economic impact of all the new federal dollars associated with Medicaid expansion in the year 2016, i.e., implicitly comparing to today’s status quo. But it completely failed to consider that if Florida did not expand Medicaid, the federal government would end up providing even larger subsidies to would-be Medicaid eligibles who are near-poor.

States that expand Medicaid effectively are denying these near-poor individuals private coverage under the exchange. Avik Roy and Scott Gottlieb already have done more than an adequate job in explaining the adverse consequences this will have on the health of these individuals, including an elevated risk of death.

Let me use numbers from the Congressional Budget Office to illustrate. On average, the federal cost to subsidize people on the exchange will be 50 percent higher than the federal cost to cover them through Medicaid.[4] So if by agreeing to the Medicaid expansion a state gains two below-poverty Medicaid beneficiaries for every above-poverty who ends up on Medicaid instead of the exchange, it will “break even” as far as maximizing federal dollars goes. But in states that already have expanded Medicaid (prior to Obamacare) to close to poverty, it is easily possible that there will be a much higher ratio of near-poor would-be Medicaid eligible than would-be eligibles with incomes below poverty. In such cases, states will gain more federally-induced new jobs by not agreeing to expansion than if they did.

For the average state, failure to account for the exchange subsidies means that estimated job gains from Medicaid expansion are overstated by approximately 25 percent.[5] Failure to account for job losses associated with taxes required to cover state matching funds for the expansion means that job gains are overstated by another 14 percent.[6] In short, using the methodology of studies such as those done in Florida, claims of Medicaid job gains are overstated by nearly two-fifths for the average state and may be overstated by considerably more than that for particular states considering expansion.

Thus, policymakers and informed citizens always need to be on alert for exaggerated claims regarding the benefits of Medicaid expansion. For the nation as a whole, the jobs picture is unequivocally worsened, not improved, by the massive expansion of Medicaid. For individual states, the conclusion is less clear. But even states that appear to be gaining jobs on balance need to remember that these benefits are gained at the expense of poorer health among the near-poor who will be forced away from private coverage through exchanges onto the rolls of Medicaid.

This is an odious choice for governors to have to face. But it was a choice carefully crafted by Obamacare’s designers so that states would dance to Uncle Sam’s tune. And it’s merely the tip of the iceberg when it comes to using the full force of the federal government to get patients, providers, health plans and others to do its bidding. It’s hard to believe that the Framers risked their lives, fortunes and sacred honor to create a federal government with this much power. But this is where we are as a nation until and unless voters choose another direction.

Update 1

A recent report from Catalyst for Payment Reform states “recent research from the RAND Corporation indicates that every new job added to the health care sector results in 0.85 fewer jobs in the rest of the economy.” The cited study is Sood, N., Ghosh, A. and Escarce, J. J. (2009), Employer-Sponsored Insurance, Health Care Cost Growth, and the Economic Performance of U.S. Industries. Health Services Research, 44: 1449-1464. doi: 10.1111/j.1475-6773.2009.00985.x, which unfortunately is behind a paywall. This figure may seem inconsistent with my finding that average earnings for health sector workers are higher than in the rest of the economy, but a) my assertion related to hospitals and physicians (whose earnings are higher than average) since these are the components most likely to expand/benefit from Obamacare; and b) the RAND study is a dynamic assessment of the entire health sector. To the degree that recent growth has occurred in nursing homes/home health (whose workers generally earn less than the national average), this would be consistent with gains in such employment producing fewer corresponding losses elsewhere in the economy.

Footnotes

[1] Unlike the decision whether to run a state health exchange (whose final deadline was February 15), there is no deadline per se on state decisions whether to adopt the Medicaid expansion. As Governor Scott’s recent reversal attests, there is nothing that precludes a state that has decided against expansion from reversing its position down the road.

[2] In my book on The American Health Economy Illustrated, I show that average annual compensation per full-time-equivalent worker in ambulatory health services and the hospital industry (the sectors likely to benefit most from Obamacare) is higher than for private sector workers (see figures 11.2a and 11.2b).

[3] I’ve struggled to come up with the right analogy for what is going on. The state is powerless to prevent the federal government from emptying the pockets of its citizens to bankroll the expansion. (A state that accedes to expansion admittedly will increase the total amount of dollars required by Uncle Sam. But most of the revenues and economic damage resulting from those higher taxes will be imposed outside that state’s own borders.) Uncle Sam is effectively saying to the states “I already have your money. You can get some of it back if you agree to expand. Otherwise, we’ll be happy to spend it on other states willing to play by our rules.”

“Theft” seems too strong a word to use-even though a majority of Americans, especially in Red states, opposed Obamacare before and after its enactment-since Uncle Sam is, in effect, offering a “rebate” to victims willing to go along with the new rules of the game. There’s all flavors of extortion, ranging from “blackmail” (but in this instance Uncle Sam is not threatening to reveal damaging information) to “shakedown” (although again, Uncle Sam is not threatening to do damage to states unwilling to comply). “Ransom” comes closer to the mark, except that in this instance, the victims can never be made whole (in contrast to a true ransom situation in which any amount paid in ransom to recover something taken hypothetically might also itself be recovered if law enforcement efforts are successful).

However one characterizes the situation, it is coercive. States are not behaving voluntarily in an arms-length relationship with Uncle Sam on a level playing field. Instead, Uncle Sam has rigged the rules to ensure an outcome much more to the liking of Obamacare’s designers than that of the general public.

[4] In dollar terms, the CBO estimates that the average exchange subsidy for the near-poor who otherwise would qualify for Medicaid were a state to decide to accept the expansion would be $9,000. The average federal Medicaid savings for such individuals would be $6,000.

[5] For the nation as a whole, the Urban Institute calculates that states would receive 5.1 times as much federal funding if all of them agreed to the Medicaid expansion than if all of them did not. However, that is an average which would vary considerably by state, depending on how generous its Medicaid eligibility standards were prior to the enactment of the ACA. Thus, imagine that a study showed a state would gain 51,000 jobs due to expansion. The Urban Institute figures imply that it would gain 10,000 jobs anyway even without expansion due to the additional federal exchange subsidies for people who otherwise would become Medicaid-eligible under an expansion. Thus, the correct estimate of jobs gained from Medicaid expansion is only 41,000, meaning that the study overstated the net number by roughly 25 percent.

[6] The Florida study focused on 2016, when the federal government will still be covering 100% of the cost of the expansion. But by 2020, states will be responsible for matching costs of 10 percent of expansion benefits and for all years states are responsible for 50 percent of any additional administrative costs related to expansion. Medicaid administrative costs average 5 percent of spending. Thus, states will be responsible for about 12.5 percent of Medicaid costs over the long run, meaning that 1/8 of any estimated federally-induced job gains would be offset by corresponding job losses arising from state taxes required for the Medicaid match. This means that job gains are overstated by 14.2 percent (12.5/87.5 = 14.2%).